604 - The profit-structure relationship, efficiency and mergers in the European banking industry: an empirical assessment

Wetenschappelijke publicatie
Date 1 December 1999

An empirical investigation of the relationship between market share or concentration and return on equity or assets provides evidence for the existence of a profit-structure relationship in the European banking sector. Testing several market-power and efficient-structure theories reveals that X–efficiency is the crucial factor explaining the profit-structure relationship because it stimulates both profitability and market share. Bank mergers in recent years have been successful because, on average, X-efficiency and profitability have improved after the consolidation. Moreover, there are no indications of unfavourable price setting behaviour as a result of increased market power. Key words: Profit-structure relationship, bank efficiency, bank mergers JEL codes: G14, G21, G34, L11